Putting people first

Joseph Muscat's reply to the budget speech was characterised by the Labour Party's priority to put people first. After a less than brilliant example of competence in managing the country's finances for the past year, the government decided to make people pay for its carelessness and exacted even more payments from already overburdened households and businesses.

In stark contrast to this callous attitude, Muscat spent the best part of two hours giving practical suggestions on certain measures that could help to put more money in people's pockets. At a time when the economy is sagging, it makes sense to stimulate public and private consumption to avoid a bigger slump.

This is what other world leaders are doing. UK Prime Minister Gordon Brown has announced a fiscal package that will help British households cope with the looming recession. Tax cuts will be the most effective element of this feature because they will enable families to spend more and stimulate growth through consumption.

Public expenditure is another important element. However, there is normally quite a long time lag between the initiation of these projects and money flowing into the real economy. So a combination of both measures is needed.

The local situation is nowhere near as satisfactory as this. Through sheer incompetence, the government last year failed to spend the money it had allocated for capital expenditure. It tried to make up on the overspend in recurrent expenditure by cutting much needed productive capital investment. So how are we to believe it when it says it will be spending more in 2009?

The water and electricity hike in prices has placed an unbearable burden on families' finances. People are now fearing for their jobs and cutting on expenditure. This in turn is making the economic slowdown even worse. What we need now is two or three years of economic stimulation until the world economy recovers.

Of course, what we are proposing has to be seen in the context of what is happening the global economy. If the economy was booming we would recommend that people save for a rainy day. But the rainy day is now with us and we need to find a way of keeping the wheels of the economy turning, albeit at a slower rate.

The government can do very little with monetary policy to address this issue. Interest rates are now fixed by the European Central Bank and it is doing the right thing in reducing rates. Of course our own government needs to ensure that our banks pass on the full benefit of the reduction in interest rates to their clients. So far they do not seem to be doing this.

Other tools in the government's domain are public expenditure and fiscal policy. The amount allocated for productive public expenditure may seem substantial, but this government has earned an unenviable reputation of not sticking to its projections. Last year it failed miserably in sticking to its capital expenditure targets.

Since expenditure in infrastructural projects usually has a long time lag until the effects of increased consumption are felt, a loosening of fiscal policy is also needed. Admittedly public finances are not brilliant at present. But if tax cuts are well tailored and aimed at the lower income groups that tend to spend whatever tax savings they acquire, then private consumption can indeed be stimulated and the economy helped to remain buoyant. I need hardly stress that this is a prescription for a rare illness that fortunately does not hit us too frequently. In normal times, when economic growth is healthy and prospects encouraging, I would prescribe a very different set of policies.

The few measures meant to strengthen the environment were marred with elements of tax imposition. The car registration issue is a case in point. While we all agree that we need to motivate people to be more conscious of protecting our environment, we should be using positive motivators for people to do so rather than impose higher taxes.

Moreover, sectors that are passing through a difficult phase, like tourism, are also being penalised rather than encouraged to face the coming storms with added strength. The tax to be imposed on tourists for every night they spend here from 2010 may not be high, but it will do nothing but make our product even less competitive.

Public finances are in a mess because the Gonzi administration wasted valuable public resources in the run up to the last election. Now it is ignoring ordinary people's interests because for the next few years it will not need their vote to remain in power.

The people of these islands are much better than their government and they deserve to be treated more fairly.